Saudi Arabia Fertilizers Co.’s (SAFCO) net income of SAR 522.2 million in the third quarter (Q3) 2018 topped Aljazira Capital’s and market expectations of SAR 473.3 million and SAR 503 million respectively, the brokerage firm said in an earnings review.
“The deviation of Q3-18 earnings from our estimates is mainly ascribed to higher than expected gross margin and contribution from Ibn Al-Baytar, as the net profit contribution stood at SAR 43.8 million as compared to our estimate of SAR 23.5 million and SAR 20.2 million in Q2-18,” Aljazira Capital added.
Gross profit margins expanded by 547 basis points to 58 percent in Q3 from 52.53 percent in Q2 2018, on higher urea prices and operating efficiency.
Operating efficiency and improved urea prices are the key catalyst for SAFCO.
“Operating rate is likely to stabilize above 95 percent in the fourth quarter (Q4) of 2018 and fiscal year (FY) 2019. Ibn Al-Baytar contribution has almost doubled in size, which is considered as an opportunity for future growth if the acquisition succeeds,” the report said.
A 30-day scheduled maintenance at Ibn Al-Baytar is likely to weigh slightly on Q4 2018 bottom line, but overall improvement is expected in FY18-19.
“SAFCO’s net income was revised up to SAR 1.688.0 million (4.05 EPS) for FY18, supported by higher than expected gross margin in Q3-18 and 13.5 percent increase in Urea price since our last update to reach $340 per tonne Vs. $300 per tonne,” Aljazira Capital said.
Cash dividend is expected to be raised to SAR 3.0 per share in FY18.
Aljazira Capital remained “neutral” on the stock, but upgraded the target price to SAR 73.50.
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